Even as the downturn continues, purchasing professionals who successfully devise and execute strategies that minimize risk and reduce costs today will continue to thrive.

Purchasing departments everywhere are in a challenging position. Today they are required to increase their organization’s cost savings with smaller budgets. Yet this position also offers a chance at success despite tough conditions.

According to a recent Aberdeen Group report, The CPO’s Agenda 2009: Smart Strategies for Tough Times (registration required), chief procurement officers “who successfully devise and execute strategies in these tough times will continue to rise.”

To help steer their companies through this recession, CPOs must create and implement strategies that will address their two most pressing concerns: cost reduction and supply risk. Almost all (91 percent) of Aberdeen’s survey respondents cited cost reduction as a top business pressure and 71 percent believe supply risk was increasing.

These findings are in line with those of a recent IBM survey of nearly 400 global chief supply chain officers, who cited cost containment (55 percent) and risk management (60 percent) as among the top supply chain concerns.

It’s a tricky balancing act, CPO Agenda says, adding that “balancing pressures to cut costs and improve cash flow on the one hand with measures to ensure the continued health of key suppliers on the other is arguably one of the greatest challenges now facing CPOs.”

“[A]cross a decade of global supply management research,” Aberdeen says it has “never seen the pressure to find savings reach this high level.” To cut costs, best-in-class companies from the Aberdeen research — those found to achieve 88 percent spend under management and net 8.5 percent cost savings — “accelerate plans to source new or renegotiate current contracts and prioritize speed to implementation as much as savings.”

CPOs are therefore advised by CPO Agenda to review all the purchasing department’s business processes, including workflow. “The application of ‘lean’ relates just as much to purchasing as it does on the manufacturing floor,” CPO Agenda notes. As such, companies should reassess tasks based on the value they bring to the business and eliminate those that are unnecessary or outdated.

The same concept applies to the management hierarchy. Aim to limit the number of layers and have a reasonable management span of control, CPO Agenda says. “A span-and-layer study often reveals positions in the organization that can be redeployed. This has the added benefit of … reducing communication gaps.”

CPOs also should identify areas that can be made more efficient, like converting suppliers from manual invoicing to electronic, CPO Agenda recommends, explaining:

With business processes streamlined, layers removed and greater role consolidation and clarity, purchasing’s fixed costs can be reduced or freed-up staff redeployed to areas where spend was either under-served or not addressed previously at all.

Likewise, Aberdeen Group offers the following strategy suggestions for cutting costs:

• Perform spend analysis regularly and incorporate them into a comprehensive sourcing strategy;
• Develop a pipeline for spend under management targeting specific categories;
• Add savings quotas to staff’s incentives;
• Conduct regular contract compliance audits;
• Work with the CFO to develop cash management strategies; and
• Hire experts from the industry to give insight from the “other side of the table.”

Handling supply chain risks, however, is not as clear-cut. It is difficult “to gain consensus on the definition of supply risk,” Aberdeen Group says, but “CPOs must work to develop an institutional capability to ‘know it when they see it’.”

Fortunately, there are steps they can take to help them recognize risk.

CPOs should consider developing a supplier-tracking program that can affect revenue, production and reputation. The tracking metrics should cover financial, operational, geopolitical and industry risk, Aberdeen Group advises.

While it is important to concentrate on tier-one suppliers, second-tier suppliers and beyond should not be allowed to “slip below the radar,” another CPO Agenda report states. “CPOs need to understand the nature and extent of risks to which their suppliers may be exposed and put a strategy in place to manage these before it is too late.”

To get an idea of how suppliers are coping, CPOs can glean information from understanding their suppliers’ investment plans, capital commitments and banking deals, CPO Agenda says. Using outside financial or accounting companies, businesses can get detailed financial data about key suppliers and then be able to categorize them into high, medium or low financial risk levels, the Institute for Supply Management (ISM) adds. CPOs should also talk to their accounts payables department to find out which suppliers are tight on cash because “these suppliers are making weekly or monthly arrangements to pick up checks instead of waiting for the two-to-three-day mail float,” ISM notes.

Another way to get a feel for suppliers’ viability is to walk through their facilities, ISM says. “Their health can be quickly determined on the shop floor and best understood by talking with the operators and plant management.”

Once CPOs know which suppliers are in trouble, they can address the situation.

According to CPO Agenda’s recent CPO poll, 38 percent switched business to more stable suppliers, a similar proportion were changing specifications to widen supply options and more than 50 percent reduced the number of single-source arrangements.

Another option is to help the struggling supplier or suppliers. “Since [companies] are inextricably linked with certain suppliers,” Purchasing Magazine says, “it is in their best interest to help their key suppliers out.”

While it will certainly be a challenge, CPOs have many options for helping their companies succeed. By making sound strategic choices, CPOs have the ability to lead their companies through the downturn.

Earlier

Purchasing 2009: Unexpected Opportunities

4 Sourcing Strategies During a Downturn

Risk Management a Top CPO Priority

Spotting a Troubled Supplier

Resources

The CPO’s Agenda 2009: Smart Strategies for Tough Times (registration required)
by Andrew Bartolini
Aberdeen Group, April 2009

The Smarter Supply Chain of the Future
IBM, January 2009

Corporate Purchasing Confidence Presents Risks for Long-Term Savings
BravoSolution, April 14, 2009

Responding to Recession
by Nick Martindale
CPO Agenda, Winter 2008-2009

Improve Organisational Efficiency
by Carolyn Woznicki
CPO Agenda, Winter 2008-2009

Reading Suppliers’ Vital Signs
by Dan O’Regan
CPO Agenda, Winter 2008-2009

CPO’s Priority: Manage Risk
by Fred Heegan
Institute for Supply Management, March 2009

Clorox Outlines Supplier Management Strategies for Tough Times
by William Atkinson
Purchasing Magazine, April 30, 2009